Blog – Averting Greek Tragedy Epilogue or Prologue?

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Despite reaching a final agreement with creditors on its third bailout in five years, Greece still faces an uncertain future within the European Economic and Monetary Union (EMU). Embattled Prime Minister Alexis Tsipras resigned from office in a bid to solidify a fresh mandate from the Greek people and another round of snap elections is scheduled for September 20th. Against the backdrop of significant political uncertainty, ongoing capital controls, unresolved debt issues and a complete structural overhaul of the Greek economy we rejoined Caglar Somek, chief investment officer of Caravel Fund, to get his current views on the unfolding Greek drama.

“There is no guaranty that Tsipras will return to power with the clear mandate he desires, despite remaining the most popular political figure in Greece” says Somek. Recent evidence buoy this notion as late-August ProRata poll results show Syriza in the lead with 23% of the electorate, but the main opposition New Democracy is close behind with 19.5%. The 11 point retrenchment in support for Syriza (compared with ProRata’s early-July survey) did not swing to Syriza’s anti-bailout offshoot either, the Popular Unity party, which polled only 3.5%. “Consistent with the one-hundred-eighty degree turn by Tsipras during the negotiations, there is still little appetite among the Greek people for a return to the drachma” asserts Somek. “Unless Tsipras is willing to make another u-turn, a grand coalition with New Democracy is very hard to envision at this stage, which makes for a muddy political outlook as multiple centrist parties will have to come together.” The prospect of a multiparty coalition attempting to deal with internal discord over unpopular bailout measures could result in a very fragile government.

On the controversial issue of Greek debt the IMF has put its involvement in the bailout on hold, pending reconciliation with the European Stability Mechanism (ESM) on “debt sustainability.” The ESM’s approach of framing the problem in terms of gross refinancing needs is at odds with the IMF’s assessment of overall debt levels past 2030.

“Add this to the long list of Greek myths about the Eurozone crisis” says Somek. “Along with the idea that French and German banks benefited most from the past bailouts, the notion that Greece’s crushing debt is a current problem is not borne out by the facts.” As highlighted in Averting Greek Tragedy, the cash interest costs on Greek debt prior to the bailout (as a percentage of output) were comparable to many significantly less-indebted EMU members, including Germany. And according to the terms of the most current bailout, Greece will receive comparable treatment over the next decade as interest payments will average 3.7% of GDP until 2020 and then 4.3% until 2024 (thanks in part to the cheaper EFSF facility of 1.65%). By 2024 Greece’s debt-to-GDP could fall to approximately 150%, assuming the newly created privatization fund is able to pay off the $25 billion earmarked for bank recapitalization loans. Finally, there are strong indications that Greek debt will be reprofiled by 2016, including maturity extensions and additional interest deferrals. “A lot of economic destruction was endured in order to get to the outcome that was anticipated almost a year ago” commented Somek.

While many commentators have remarked on the unprecedented structural interventions by creditors, Somek has focused on the political cover these mandated reforms will provide legislators in Greece. “Any backlash over bailout terms can be laid at the feet of EMU authorities and this will prove convenient going forward.” However, much of the talk surrounding implementation of tough reforms is premature in Somek’s view. The more important immediate issue is capital controls and how these will weigh on demand for the balance of the year. “Greece is already suffering from a very poor investment spending environment. The collapse of PMI, the frontloaded consumption in Q2 and the continued poor export environment are all enormous challenges. Capital controls make things even worse.” The upshot is that Somek believes Greece will be hard pressed to meet any of its already diminished economic targets for this year. “A big part of the bailout package is the recap of Greek banks, which were crippled during the prolonged showdown with creditors. This recap process will stretch well into 2016 and make a quick economic rebound very challenging.”

Executive Summary

Alexander Schay

Partner & Managing Director Ultima Thule Research

Alexander Schay is a Managing Director at Ultima Thule, an equity research company focused on developing markets and an equity partner at WK Associates, a boutique energy consulting firm with a specialization in emerging market oil and gas.

Alex holds both an MS in Risk Management and an MBA from the Stern School of Business at New York University.